Evidence of meeting #50 for Finance in the 41st Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was unions.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Arthur Cockfield  Professor, Faculty of Law, Queen's University, As an Individual
Mike Moffat  Assistant Professor, Ivey Business School, As an Individual
Eric Dillon  Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada
Bruce MacDonald  President and Chief Executive Officer, Imagine Canada
Jon Cockerline  Director, Policy and Research, Investment Funds Institute of Canada
Brigitte Alepin  Tax Expert, Agora Fiscalité, As an Individual
Jennifer Robson  Assistant Professor, Kroeger College, Carleton University, As an Individual
Frances Woolley  Professor, Associate Dean, Carleton University, As an Individual
Clay Gillespie  Member, Board of Directors, Conference for Advanced Life Underwriting
Andrea Mrozek  Executive Director, Institute of Marriage and Family Canada

3:30 p.m.

Conservative

The Chair Conservative James Rajotte

I call this meeting to order.

This is meeting number 50 of the Standing Committee on Finance. Our orders of the day are pursuant to Standing Order 83.1, continuing with pre-budget consultations 2014.

I want to thank our guests very much for coming in this afternoon. Colleagues, we have two panels before us on the pre-budget consultations.

In the first panel we have, from Queen's University, Professor Arthur Cockfield. Welcome back to the committee. Also back to the committee we have Professor Mike Moffat from the Ivey Business School. From Credit Union Central of Canada, we have the CEO of Conexus Credit Union, Mr. Eric Dillon. Welcome. From Imagine Canada, we have the president and CEO, Mr. Bruce MacDonald. From the Investment Funds Institute of Canada, we have the director of policy and research, Mr. Jon Cockerline.

Welcome to all of you. Thank you so much for being with us. You each have five minutes maximum for your opening statement, and then we'll go to questions from members.

We'll begin with Professor Cockfield, please.

3:30 p.m.

Professor Arthur Cockfield Professor, Faculty of Law, Queen's University, As an Individual

Thank you,

Mr. Chair, ladies and gentlemen.

Thank you again for the privilege to appear before you.

The last time I spoke before this committee was during the FATCA hearings, which were quite contentious. Of course, the budget is very important to all Canadians, but I suspect it might be a little bit less contentious today. Again, thank you.

In my brief comments I thought I would emphasize what I consider to be the academic tax consensus surrounding how one should form a budget. None of this will surprise you. You need a broad base, fewer loopholes.

Today I have come from my Queen's law class. It ended at one o'clock. I taught them a little bit about the 1987 budget of Michael Wilson, the former finance minister. I teach that as the high-water mark of my generation in terms of achieving a fair budget which both brings in revenues and drives the economy forward. As a very broad generality then, one should try to broaden the tax base, reduce shelters, reduce loopholes, and potentially even bring down rates at the same time.

I know this would be a very ambitious agenda that's not going to be implemented within the next budget, so my main recommendation today would be, within this budget, to appoint an independent expert panel to provide advice on the short-term and long-term options to streamline our current tax system. The problem is that since that 1987 budget, almost 40 years have passed and the amount of tax provisions have ballooned to a significant extent.

In the United Kingdom, they have a permanent independent tax simplification office. If we could allocate moneys and budgetary amounts toward that sort of independent expert panel, I think you would see a lot of good come out of it.

I recently participated in an expert panel at the Mowat Centre of the University of Toronto. This was a project directed by Matthew Mendelsohn, and it involved two years of analyses concerning how to modernize our corporate income tax system. A report was recently co-authored on this topic by my colleague Robin Boadway at Queen's, as well as his co-author Jean-François Tremblay.

Through that process one could see, because it was an independent panel, an awful lot of thought put into the long term. I think that's what Canada's tax system needs, this long-term independent perspective.

I have two specific recommendations.

I have previously testified on several different occasions about the problem of offshore tax evasion. I think you're all familiar with the 2013 data leak obtained by the International Consortium of Investigative Journalists. They partnered with the CBC, which retained me. It showed that there are thousands of Canadians maintaining offshore accounts. There was clear illegal activity taking place. I've also consulted with the Auditor General more recently on this file.

There are a lot of revenues, in my opinion, to be found in the offshore world. I should note, of course, that much of this activity is legal, but much of it is not. To the extent the government could invest funds in tracking down these offshore tax cheats, for every dollar you put into that system, I suspect you'd see a significant return.

This brings me to the final thing I'd like to mention. Again, I've just talked about the need to broaden the tax base, but I'd also highlight what I thought was a very reasonable reform effort back in 2007, when this government introduced the working income tax benefit, the late Jim Flaherty's WITB. It was based on the Americans' earned income tax credit. It's generally available to working families with a low income. It gives them a refundable tax credit. This has turned out to be a powerful weapon to fight poverty in our country. To the extent the government would see fit to extend these benefits and enlarge them, in my opinion this would be a worthwhile reform effort.

Thank you, sir.

3:35 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much for your presentation.

We'll now go to Mr. Moffat, please.

3:35 p.m.

Mike Moffat Assistant Professor, Ivey Business School, As an Individual

Thank you for having me here today.

My name is Mike Moffat. I'm a business owner, a chief economist with the Mowat Centre, and an assistant professor at the Ivey Business School in London, Ontario. Those are a lot of hats, but I'm here representing my own views.

I'm here today to talk about tax policies and regulatory burdens. I share the views of my University of Calgary colleague, Jack Mintz, who has called for tax simplification, stating in the National Post that the tax system has gone off the rails.

Before he enacted the Tax Reform Act of 1986, Ronald Reagan described the tax code as being complicated, unfair, and cluttered with gobbledygook and loopholes. The same criticisms can be applied to the Canadian tax system, which is in dire need of reform.

Let's start with income tax. The current system is riddled with a variety of tax expenditures. The system, while well intentioned, has Canadians overpaying tax each month, then has some of that money returned to them if they remember to save a receipt and fill out the correct box on their tax form. This places a burden on families, lengthens tax forms, and requires the government to police credit claims.

This added complexity could be justified if the credits increased the use of public transit or got more kids playing sports, but research in the Canadian Tax Journal shows that the children's fitness tax credit largely pays families for what they were planning on doing anyway.

We can greatly reduce regulatory burdens on Canadians by ridding ourselves of many of these tax expenditures and use the savings to either lower income tax rates or by strengthening the universal child care benefit or HST rebate programs and allow families to decide how to spend their hard-earned dollars.

Much can be done to reduce the regulatory burden the tax system places on Canadian businesses. The tariff system is a prime example. During the so-called iPod tax debate, government departments were divided on whether televisions and MP3 players were considered computer parts for tax purposes, with the CBSA and the Department of Finance providing opposing answers to Canadian businesses. If the government cannot decipher the tariff code, what hope do Canadian businesses have?

This government has eliminated tariffs on many items, and I commend them for doing so, but much more can be done at little cost to the treasury. One such example is propylene copolymers that are used as an input by plastics, foams, and auto parts manufacturers in southwestern Ontario. There is a 2% tariff rate on imports of this chemical unless it is from a country that Canada has a free trade agreement with, such as the United States, in which goods come in tariff-free.

In 2012 the WTO estimates that the government collected only $360,000 in tax revenue on over $485 million in imports for an effective tax rate of 0.08%.

The customs tariff is littered with items from grape crushers to storage heating radiators where tariffs generate almost no revenue, but impose significant regulatory burdens. In a recent paper, the Canadian Council of Chief Executives detailed the expenses companies face in importing goods at preferential tariff rates. Firms must keep detailed records for several years and ensure their imports meet the rule-of-origin requirements in order to claim a preferential rate. These rules are not simple or trivial. The NAFTA rules-of-origin regulations alone are 556 pages long.

A study by Keck and Lendle found that many companies find it cheaper to avoid these regulatory costs and simply pay the higher rate, bypassing the benefits of Canada's free trade agreements. Due to the high fixed costs involved in tracking and claiming preferential tariffs, small and medium-size enterprises are less likely to take advantage of free trade deals.

To summarize, large portions of the tariff code impose significant regulatory burdens and discriminate against small and medium-size businesses while generating very little revenue for the government.

My primary recommendation is to set a zero MFN rate on tariff items with very low effective rates as it would provide substantial benefits at minimal cost.

I could talk for hours on these issues and I suspect many in this room feel that I already have, so I look forward to your questions.

3:40 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much, Mr. Moffat.

We'll go to Mr. Dillon, please.

3:40 p.m.

Eric Dillon Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Thank you, Mr. Chair and the committee, for this opportunity to share with you the credit union's systems recommendations for your pre-budget consultation process.

I am especially grateful that you have done something different this year by asking to hear from on the ground practitioners like me. This shift feels right to me, because one of the things we do at Conexus Credit Union where I'm the CEO is to always ask how we can do things differently. This approach has helped us to grow, to become Saskatchewan's largest credit union and one of the 10 largest in the country.

With that in mind, I, too, want to do things a bit differently today. Instead of telling you about the credit union system in great detail, I want to jump straight to what you in Ottawa refer to as our ask. As I discuss our proposal, I'll weave in facts about our system.

What are we asking for? Quite simply, credit unions are calling on the federal government to create a capital growth tax credit. It would be calculated at 5% of the growth in year-over-year retained earnings. If a credit union were to increase its retained earnings by $1 million, it would save $50,000 on its tax bill. It's that simple.

I'm sure you're accustomed to receiving requests that probably sound a lot like mine do. Your default response is probably to ask why the federal government would create a special tax measure for credit unions. My answer is that we're not asking for special treatment; we're asking for fair treatment that recognizes credit unions are structured very differently than charter banks. Both operate in the same sector. Both offer similar banking services. Both are required to hold large amounts of capital and both are well-regulated and prudent, but that's where the similarities end.

We're cooperatives. They're joint stock corporations. They're regulated federally. We're regulated provincially. They're small in number and operate across the country and are internationally active around the world. We have 320 credit unions operating within provincial boundaries and serving communities.

These differences show up in ways that are relevant to the question of how we should be taxed. We give back proportionately more to our communities than they do—on average, 4.5% of pre-tax profits across our system versus 1% for charter banks. In my particular credit union, last year it was 5.8% of pre-tax profits, and most recently, a $1 million contribution to a new children's hospital in Saskatchewan, the first in our province.

Because we're cooperatives and not pressured to generate short-term results, we tend to stay invested in our communities even when competitors chase more profitable opportunities elsewhere. In fact, the credit union system today operates 380 branches in communities where there is no other physical banking presence.

These differences show up in other ways. CFIB data shows that credit unions, including Desjardins, have the second highest share of small business lending in this country at 18.6%. In my province of Saskatchewan, the credit union system provides just over half of all small business loans. We have been able to achieve that kind of success because the CFIB says we dominate the banks in providing exceptional service to the small business market. How? The CFIB would say that small businesses value our ability to offer financing at low fees with high-quality account managers. Our people understand small business. They know this sector is vital to a growing Canadian economy, the local economy, both in good times and in bad.

The data also tells another important story. On average, almost 80% of our credit union equity is made up of retained earnings versus only 45% for charter banks. In my credit union, that number is virtually 100%. The composition of our capital tells a story of a sector that grows its business in an organic way, at a speed that's profitable, sustainable, and prudent.

Our tax proposal recognizes this fact about credit unions. It also recognizes that we do not issue shares on publicly traded markets to support our growth. Because of that, our cost of capital is higher than that of the banks, whose shareholders can benefit from the 50% capital gains exemption and tax-incentivized savings plans, such as RRSPs, RRIFs, and the like.

At the same time, our calculations suggest that if the federal government does not act on our proposal, my credit union could potentially pay a higher effective tax rate than the banks by 2017. Obviously we think the tax system should strive for fairness and a competitive balance among organizational forums, especially when regulators, provincial, federal, and other, are demanding that financial services companies build and hold more capital.

3:45 p.m.

Conservative

The Chair Conservative James Rajotte

You have one minute.

3:45 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

Our proposal does that and more. We estimate that in the aggregate our proposal could help credit unions make another $700 million in loans at the cost of a $66-million aggregate tax credit. In my credit union, that means another $20 million for small businesses and homeowners.

From these numbers, you can see how our tax proposal aligns with the federal government's effort to ensure continued economic prosperity through targeted tax relief and support for small business.

To conclude, we hope you will support our call for a capital growth tax credit. We think it's the right way to achieve a competitive balance in the tax system, help small businesses, and support the growth of the Canadian economy.

Thank you for your time. I'm certainly happy to answer questions.

3:45 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much, Mr. Dillon.

Mr. MacDonald, please.

3:45 p.m.

Bruce MacDonald President and Chief Executive Officer, Imagine Canada

Thank you, Mr. Chair.

My thanks to the committee for inviting me to testify before you today.

As you know, Imagine Canada is the national umbrella organization for the charitable sector in Canada.

As committee members, you are well aware of the contributions made by charitable organizations in areas as diverse as education, arts and culture, amateur sport, youth services, international development, the environment, health care and religion.

You know from experience the contribution made by charitable organizations in your constituencies to the quality of life; they make Canadian communities pleasant places to live, work and invest.

What is less well known is that charities together with public benefit non-profits generate more than 8% of GDP and employ two million people every day in Canada. We're one of the fastest growing sectors, yet we're reaching a point where demand for what we do is outstripping our financial capacity to deliver. As we work to strengthen the financial footing of charities, we welcome the opportunity to partner with the federal government to unleash the tools through taxation and regulatory reform that will allow charities to meet demand.

Our first recommendation is the stretch tax credit for charitable giving, to help Canadians increase their donation over time and make giving a lifelong habit. Unlike some tax credits that reward people for what they are already doing, the stretch only triggers a government investment if and when Canadians change their behaviour by increasing their giving over the previous year.

This committee has heard a great deal of support for the stretch during the incentives for charitable giving hearings, and you recommended it for serious consideration once the books were balanced. The government took note, and in addition to announcing the super credit in budget 2013, also made the following commitment:

...the Government will work with the charitable sector, including Imagine Canada, to encourage more donations by a greater number of Canadians....

The first-time donor’s super credit was an encouraging start. Now it's time to finish the job by helping more Canadians to do more.

What would the stretch mean? It would mean more dollars for the widest array of good causes, more investment in every community, and broad-based tax relief. It would mean that donations that have stagnated would begin to grow again, as more than half of donors say they would increase their giving if there were better tax incentives. What better investment could we make as we approach the 150th anniversary of Canada than to give Canadians from all walks of life and all means the tools to better invest in their own communities and in the causes that make a profound difference in their quality of life.

This fall we asked charities across the country to connect with their members of Parliament, as they are best placed to let you know what the stretch would mean for their organizations and their own communities. In only the first six weeks of the campaign, over 150 MPs have received letters, e-mails, phone calls, and visits from local charities, and we're just getting started. We hope we can count on all committee members to strongly endorse the stretch in your pre-budget report.

Our other two recommendations this year deal with regulatory issues and also get at the heart of charities' financial resources and sustainability.

The first of these is merchant fees on credit card transactions. Last year's budget signalled the federal government's concerns about these fees, which are disproportionately high in Canada. Proposed legislation in the Senate would, among other things, eliminate these fees for registered charities. Merchant fees have a real and significant impact on charities' bottom lines. They divert millions of dollars that could otherwise be invested in responding to the growing demand for charity services.

We understand that regulation is a last resort, and we recognize that a voluntary arrangement may prove preferable. Either way, charities must be invited to the table and benefit significantly from much-needed reforms.

Finally, we hope to see some explanations and possible changes in terms of the regulatory and administrative obstacles that limit the access of charitable organizations to federal services that provide advice to companies when they are seeking new sources of revenue. This is particularly important because governments are looking for new forms of social financing and entrepreneurship in order to fund vital initiatives that involve charitable organizations. The economic contribution of charitable organizations in Canada is huge already; giving them access to those tools would allow even more growth.

Thank you very much.

3:50 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much for your presentation.

Mr. Cockerline, please make your presentation.

3:50 p.m.

Dr. Jon Cockerline Director, Policy and Research, Investment Funds Institute of Canada

Thank you, Mr. Chair and members of this committee, for this opportunity to provide the views of members of the Investment Funds Institute of Canada, IFIC, at this meeting.

IFIC is the voice of Canada’s investment funds industry. By connecting Canada’s savers to Canada’s economy, our industry contributes significantly to Canadian economic growth and job creation.

In my remarks today, I will focus on recommendations related to three areas: registered plan reforms in support of retirement savings, GST/HST reform, and equitable taxation for mutual fund corporations. Also, I'll be pleased to respond to committee questions on any of the recommendations provided in our formal brief of August 6, 2014.

IFIC has consistently supported the government’s efforts to offer Canadians more ways to save for their retirements and other financial needs. Our industry has been an important contributor, for example, to the success of RRSPs, RESPs, RDSPs, and TFSAs, to name a few, and we have supported new savings programs, such as PRPPs, as a matter of good public policy, even though our members are not positioned to participate directly in the manufacture of these plans.

While GRRSPs, group registered retirement savings plans, fulfill the same goal as PRPPs, and that is, long-term savings through a workplace plan, they are not accorded similar tax and regulatory treatment. Such differences unnecessarily disadvantage GRRSPs, which are an accessible and efficient option within the retirement savings landscape. To ensure that GRRSPs continue to fulfill this role, we ask that that they be accorded the same treatment as that of PRPPs with respect to payroll tax exemptions, auto enrolment, and the locking in of employer contributions.

During the 2011 federal election, Prime Minister Harper announced his intention to increase the annual individual TFSA contribution limit to $10,000 after the budget returned to balance. We agree that increasing the TFSA contribution limit would improve the options and flexibility available to Canadians for saving and investing. We ask the government to consider raising the TFSA contribution limit to $10,000 annually.

A recent report published by the C.D. Howe Institute highlighted the impact of mandatory minimum withdrawal rules for registered retirement income funds, RRIFs. As the report notes, these rules have not kept pace with gains in Canadian life expectancy, and as such, can increasingly cause seniors to outlive their savings under the current withdrawal rates. We ask the government to consider increasing the mandatory age for initial RRIF withdrawals and/or reducing the minimum drawdown amounts in order to mitigate the risk that seniors outlive their savings.

Since its inception in 1991, the GST has applied four to five times more heavily to the value of services provided to mutual and other funds than to the equivalent value of services provided to non-fund investment products. For the majority of mutual fund investors, the GST/HST on the management expense ratio is a tax on retirement savings. Today, almost 57% of assets under management in Canadian mutual funds are held in registered plans by investors saving for retirement. We ask the government to consider applying GST more fairly to fund products in order to relieve the tax burden on Canadians who are saving for their retirement.

When calculating their taxable corporate income, most corporations in Canada are entitled to apply the 13% general rate reduction to income that is not eligible for another corporate tax reduction. Mutual fund corporations, however, are not allowed to apply this reduction because two of the principal forms of mutual fund corporation income—capital gains and dividends—are already subject to tax reductions. Yet mutual fund corporations may earn income from sources other than dividends and capital gains, such as interest income or income from foreign sources. To rectify this imbalance, we request that Canadian mutual fund corporations be entitled to apply the general rate reduction to all eligible income.

Mr. Chair, that concludes my opening comments. I would be pleased to answer your committee’s questions.

3:55 p.m.

Conservative

The Chair Conservative James Rajotte

Thank you very much for your presentation.

We'll begin questions with Mr. Cullen, please, for seven minutes.

3:55 p.m.

NDP

Nathan Cullen NDP Skeena—Bulkley Valley, BC

Thank you to all our guests today.

Mr. Dillon, I'm going to start with you, and then I will have a couple of questions for Mr. Moffat and Mr. Cockfield, depending on how we do with time. It will pass quickly, I suspect.

On the specific ask, as you put it, the capital growth tax credit, can you remind the committee of the amount you're seeking and recommending to the federal government?

3:55 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

By our calculation, Mr. Chair, that growth credit based on 2013 numbers would be $66 million.

3:55 p.m.

NDP

Nathan Cullen NDP Skeena—Bulkley Valley, BC

It's $66 million. Is there a multiplier with regard to what happens if the government does accept a capital growth tax credit in terms of what then manifests in the general economy?

3:55 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

There certainly is. At the current multiple levels, Mr. Chair, that would equate to about $700 million of additional lending that would take place in communities across the country.

3:55 p.m.

NDP

Nathan Cullen NDP Skeena—Bulkley Valley, BC

Say that last sentence again. Sorry; it was $700 million that would be for what?

3:55 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

It would be lent out. That could be leveraged and lent out to communities from credit unions from coast to coast.

3:55 p.m.

NDP

Nathan Cullen NDP Skeena—Bulkley Valley, BC

Connect the dots for me. There is a $66-million tax credit put through, leveraged then to $700 million through the credit unions. Why would that explicitly be made available for lending to small businesses?

3:55 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

That is the way credit unions operate, Mr. Chair. What happens in our world is as retained earnings grow and capital grows in the credit union system, that money can be leveraged. The beauty of the credit union business model today is that this money doesn't end up offshore in profit to a shareholder, but rather gets returned to communities. The credit union retains enough to invest in its future and build a sustainable model, and over and above that the money is lent out to support businesses in Canada.

3:55 p.m.

NDP

Nathan Cullen NDP Skeena—Bulkley Valley, BC

You're suggesting that by the structure, the way the credit unions are built and mandated under law, the amount leveraged of $700 million, by your estimation, would likely go back out into loans and whatnot to the small business community.

3:55 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

That's correct.

3:55 p.m.

NDP

Nathan Cullen NDP Skeena—Bulkley Valley, BC

At one point in your testimony, you talked about.... Is it your credit union that is responsible for half of all small business loans in your region? Is that right?

3:55 p.m.

Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada

Eric Dillon

No, that would be credit unions in Saskatchewan.